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When Must a Fiduciary Just Say “No” to a Client?

July 28
00:02 2015

How often has the infamous mantra “the customer is always right” been repeated in the annals of business history? It’s said every successful business follows this credo. In reality, a successful business understands this adage no_trespassing-5-1481621_300applies only applies to the target market, not anyone who happens to want to be a customer. While being careful to limit your business to its most profitable niche goes without saying, if you’re a fiduciary, telling a customer “no” may be your legal obligation.

Unlike nearly every other business, the failure to say “no” can have disastrous consequences for both the individual fiduciary and the business offering those fiduciary services. In the celebrated Dumont and Hunter Trust cases, Chase Bank, as trust to the trust in question, was originally found in breach of its fiduciary duty for not selling Kodak stock – the only holding that funded the trust. This ruling came despite the fact the grantor asked the trustee to retain the stock. Although later reversed on a technicality (not on the merits of the case), the ruling remains a vital lesson for all fiduciaries: The customer is not always right. “There are times when a fiduciary has to say no to a client and discontinue the relationship,” says Ary Rosenbaum, Managing Attorney at The Rosenbaum Law Firm P.C. in Garden City, New York. “It’s usually when the plan sponsor requests something from the fiduciary that is not in the plan’s interest, the client’s interest, and ultimately the plan fiduciary’s interest and liability risk.”

If a fiduciary is legally bound to say “no,” why do you often see fiduciaries abiding by client requests that are obviously not in the client’s best interest? “They are afraid the client will walk out of the door and they lose the income…period,” says Paul Ruedi, CEO of Ruedi Wealth Management, Inc. located in Champaign, Illinois.

With some service providers, the mandate to say “no” has caused them to do their best to avoid being deemed a fiduciary. Stuart Simchowitz, Director of Retirement Plan Services and Practice Leader for RMR Wealth Builders, Inc. in Scarsdale, New York says, “Most service providers do not consider themselves fiduciaries and in-fact the vast majority, including and especially record keepers and TPA’s, do not sign-on as a fiduciary of any stripe. They view themselves as directed providers of service and the last thing they want to do is jeopardize their fees by going down that road. They simply view it as outside the scope of their services, I do find though that schooled, credentialed, and experienced professional, dedicated, retirement plan advisers who routinely sign-on with their client plans as a fiduciary are not so shy about weighing in with an opinion in situations like that.”

Some service providers don’t have the option to decline acting as a fiduciary. Still, without appropriate training, many still think such an option exists. “Advisors who take a service provider approach with their clients are the advisors who cannot say no because they have positioned themselves as ‘order takers,’” says Jasnik Parmar, Co-Founder and President of Entry Point Advisor Network in Brighton, Michigan. “This can especially be true of brokers, where many do operate as literal order takers. Many advisors also fear, like all of us, the ramifications of making the wrong decision where they say no and the opportunity turns into the next Apple story. Plus, by saying ‘yes,’ Advisors [believe they] has an ‘easy out’ if things go south, in terms of responsibility, because it was ‘the client’s idea’ and they ‘merely’ went along with it. They fear harming their relationships and avoid this type of candor. That mindset is exactly what causes the problem. The best advisers, fiduciary or otherwise, are not afraid to tell their clients precisely what they don’t want to hear because more often than not that is why they need an adviser; Yes-men are readily available at little cost. As an adviser, your emotions/discomfort are less important than your client’s well-being.”

Yet, even when confronted with the letter of the law, there remains an urge to justify the aversion to say “no” to a client. “I think part of it has to do with trying to keep alive a legacy and the way we do things,” says Mark A. Tan, Financial Advisor at Thrivent Financial in Lake Forest, Illinois. “Providers don’t want to lose opportunities or to lose that client. I believe it’s a combination of it being hard for them to make a change, and afraid of not getting that piece of business.”

Parmar offer this hypothetical example of situations where a fiduciary must say “no.” He says, “This is common among professional athletes where sudden wealth, ego, weak financial experience, and interpersonal relationships collide. These athletes are often approached by friends, family, and even their peers with ‘business opportunities’ that sound too good to be true and often are. This is where a true fiduciary, looking out for the client exclusively, can be all the difference and prevent someone from squandering their wealth by investing in doomed ideas like floatable furniture or a $2 million bingo hall.”

When it comes to the hypothetical need to say “no,” Simchowitz says, “It is real, not fiction; a fiduciary to the plan must say ‘no’ when they know that the action being taken or suggested contravenes either the provisions of the governing plan document or the terms of DOL reg. ERISA 1974 or any known law or regulation of governing securities bodies that might have jurisdiction over the transaction.”

Fortunately, the circumstances that require saying “no” to a client are fairly straightforward. You don’t necessarily have to be an ERISA attorney to know when to say “no” and/or walk away. “When a client wants to do something that puts their plan at risk,” says Ruedi, “that is, when doing what they ‘want’ to do would compromise the probability of exceeding the plans goals, the advisor must be willing to tell the client no. For example, I have had clients that want to hold onto a very large concentrated stock position. However, when a material problem (one they simply can’t allow themselves to admit is a possibility) for that company would mean financial devastation to the client, you have to be willing to walk away on principle.”

When it comes to real-life examples, Parma says, “I know an Adviser who shared the following story: they have a client who was, until recently at the time, in management at a prominent hedge fund. The client was recently divorced and juggling raising their teenage daughter alongside the demands of their job, and it became apparent to their Adviser that something had to change. The client was already financially successful, was clearly unhappy with the trajectory of their parent/child relationship, but also felt that they had to stay in their job – it was after all a coveted position and they owed it to themselves and to those who looked up to them to stay. Their adviser, a fiduciary, took this opportunity to make a positive change that frankly didn’t benefit them [the adviser] but did their client, and told the client to quit their job before their next meeting. The client was already financially secure, and the client could absolutely take the next couple years easy and focus on what seemed to matter most: their family. This is the mark of a true fiduciary, one who put themselves behind their clients. A lesser adviser could have avoided the topic altogether, and let the client continue at status quo ante where their assets under management grew as their happiness fell.”

That was actually a less difficult “no” situation. Sometime, it’s much more challenging to summon up the courage to say “no.” Ruedi says, “Another real life example is when a client continues to spend more than their plan allows for and continuing to do so will put their plan at risk. I have had to tell clients in their late seventies that if they spend one more dollar than the plan calls for, tell me where to transfer your accounts. That strict fatherly advice, even from someone decades younger, has always done the trick.”

There are certainly other red flags that might signal to the fiduciary further due diligence is required before acquiescing to the client request. Tan says this occurs when that request is “out of the client’s area of expertise, or not something that will resonate with them or that they will understand.” That’s when the fiduciary needs to take a closer look and, if necessary, tell the client “no.”

Some advisers prefer to conduct a form of quantitative sensitivity analysis to determine whether action needs to be taken. “If not saying ‘no’ means the plan has less than a three out of four chance of exceeding the plans expectations, the plan has too much uncertainty in my opinion,” says Ruedi. “That is my trigger to make a change or to walk.”

Still others look to the letter of the law and current best practices for guidance. Simchowitz says, “Read the fiduciary regulations as currently written by the SEC, DOL and pay particular attention to the current proposals being worked on by the same entities. Seek out fiduciary education and continuing education and engage your associates and industry Thought Leadership in meaningful discussions of the subject.”

In the end, though, it may come down to a simple “you’ll know it when you see it” type of scrutiny. “There is rarely a substitute for experience,” says Parmar. “For most, it’s only when you’ve become acutely aware of the downsides of not saying ‘no’ that you can begin to be comfortable saying ‘no.’”

So, once an adviser overcomes the reluctance to say ‘no,’ how should it be done? “The best way to say ‘no’ is to tell them that you have a fiduciary responsibility to work in their best interest,” says Tan. “It may not be what they want to hear or what they expect, but it is in your duty to do so. Explaining that is usually helpful to their understanding.”

Ruedi gets a little personal, tugging at the guilt of the client. He says, “My most effective way is to tell the client, ‘Look, I am responsible for your lifestyle, it is in my hands. If I let you do what you want to do, your plan will have too much risk of failure…you could run out of money before you run out of life. When that happens, your friends will pick up on your depressed state and ask you, ‘What is wrong? What is going on?’ When you tell them you have lost your financial independence and dignity, they will likely ask who your financial planner was…and my name will simply not be on a plan that is too uncertain.’ This has been very effective.”

Then there’s always the clinical approach, one that relies on a familiarity with the law and how it’s applied. Simchowitz advises to  “be truthful and honest when explaining your position and cite the laws regulations and relevant plan documents that are not being followed. Explain that your primary job as a fiduciary is the duty of Loyalty to the Plan and to provide prudent advice and direction.”

“There really isn’t a single best way to say ‘no’ to a client because every advisor and every relationship is unique,” says Parmar. He does provide that there are “a few principles are common throughout all ‘no’ approaches: 1) Assert your expertise – a doctor doesn’t respond to a client who wants an MRI without cause by saying, ‘yeah that’s fine let me get on that for you.’ Rather they say, ‘No, you don’t need that.’ The inverse is also true, a doctor will tell a patient who wants to suddenly become a heavy smoker that it’s a stupid idea and they’ll likely end up in the emergency room or worse; 2) Be empathetic – you have to put your ‘no’ in the context of your clients’ lives and also understand what motivated them to bring the opportunity in front of you, only then can you say ‘no’ and get to solving any root causes; 3) Lay it out in layman’s terms – remind the client of both where they want to go and where they don’t want to end up. The latter is important because we are more likely to respond to concern than we are to pass on something in pursuit of a distant vision; and, 4) Give an ultimatum – if the situation warrants it (a potentially seriously bad decision), this can be a measure of last resort to stress the importance of your ‘no’ because the client either values your input and guidance (that they pay for) or doesn’t – some clients simply can’t be advised.”

Saying ‘no’ might be one of the most difficult job for a fiduciary. That ‘no,’ however, represents a legal shield that protects both the client and the fiduciary. “Fiduciaries have the responsibility to say ‘no’ to their clients whenever the client’s ideas/wants are not consistent with their best interests or long term financial health,” says Parmar. “A ‘no’ answer could be for any number of reasons, because clients, no-matter how wealthy they may be, are not usually expert financial decision makers. To me, the best advisers are the ones who are comfortable saying ‘no’ to their clients, because most of the time that is all it takes for the client to see the issue in the right light. This is doubly true, and doubly valuable, for the wealthiest clients who are often accustomed to getting their way, believe in their own demonstrably sound judgment, and have a retinue that is unlikely to challenge their decisions.”

For the fiduciary, ‘the customer is always right’ isn’t an axiom worth heeding. Rosenbaum sums it up best when he says, “A fiduciary has the highest duty of care in equity and law, so there’s a reason when the fiduciary has to say ‘no’ and ultimately walk away from business.”

Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s every 401k plan sponsor and service provider wants and needs to know.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His new book Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort is available from your favorite bookstore.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Paul Smith / NAPLIA
    Paul Smith / NAPLIA July 29, 07:51


    You and the folks you quote make so many good points in this posting. Most sales focused Advisors, for the most part have non-confrontational personalities, as do most business people, and the knee-jerk “yes” can create all kinds of problems.

    We deal with Advisor claims on a regular basis, in our Professional Liability practice, and I can’t tell you how often I have heard an Advisor bemoan the fact that he / she didn’t fire the client in question, “years ago”. We hear “they were trouble from day one, what was I thinking”? (also realizing that sometimes claims come out of nowhere).

    I’d be interested to hear what Ary and Stuart have to say about the process, or formal steps that should be taken when firing an ERISA client. What paperwork and backup documentation makes for proper risk management? How much notice should be given? Is indemnification even possible, or if not legally standing in an ERISA claim, might it be helpful in other ways?

    This is a terrific subject that deserves more attention.

    Paul Smith

  2. Robb Smith
    Robb Smith August 03, 08:36

    Paul – For clarification, saying no and “walking away” is all well and good as long as a fiduciary breach hasn’t already occurred. HOWEVER, if a breach has occurred or is in the process of occurring, any plan fiduciary that is aware of the breach – particularly an egregious one – is obligated to take appropriate action. For example, a plan committee member who becomes aware of misappropriation of plan funds cannot say, “No, I will not be part of this” and resign from the committee without first alerting appropriate authorities – either internally or, if necessary, with external authorities such as a regulatory agency. In this case, saying no and just walking away is not a prudent course of action.

    If a breach has occurred, a plan fiduciary must contact a responsible executive of the plan sponsor or the plan’s legal representative. If the sponsor ignores the complaint then the plan fiduciary is obligated to contact a regulatory agency with oversight, i.e. the DOL. If the breach is severe, it would be prudent for the fiduciary to contact a qualified legal representative for themselves and – by all means – document, document, document the whole process from first becoming aware of the breach through notifying all parties. At this point – with legal representative blessing – the fiduciary is probably safe to FORMALLY (in writing) resign as a plan fiduciary. Just my suggestions.

  3. Stephen Winks
    Stephen Winks August 05, 15:19

    Very refreshing to see a serious discussion of fiduciary duty.


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